Whither This Year’s MBAs?

By Felix Salmon

March 31, 2009

One thing drilled into every MBA student is that sunk costs are irrelevant, while opportunity costs are paramount. Which is a lesson this year’s graduating class will put to good use. Let’s say that in any given year, there’s a graduating MBA who has the choice between creating a green-energy start-up, on the one hand, or joining Goldman Sachs, on the other. Normally, the start-up loses, because the opportunity cost of going that route — all that foregone Goldman remuneration — is enormous: it probably has a present value of a good $10 million.

Today, however, the opportunity cost of starting your own company is tiny: if no one on Wall Street is hiring, then you literally have nothing to lose. To be sure, it’s not pleasant trying to make your way in the world with no steady paycheck and hundreds of thousands of dollars of student-loan liabilities. But those loans are sunk costs: there’s nothing you can do about them, and so there’s no point stressing about them overmuch. The art of any career decision is to make the best possible choice given the decision set available, rather than to kvetch about not having graduated a few years earlier, when MBAs were hot commodities.

There is a deep pool of potential investment bankers in any given Stanford MBA class. During the time these people are in school, factors beyond their control sort them into or out of banking upon graduation.

Never has this been truer than today: I’d wager that in any given MBA class, a very high proportion took the class with the intention of going into banking, and a much tinier proportion will actually do so.

The ones who don’t go into banking might be upset about their bad fortune, but I’m not sure they should be: there’s a case to be made that they actually dodged a bullet here. Given the choice, what would you rather be: a freshly-minted MBA with thousand of possible career paths ahead of you, or an MBA of vintage 2004 who got snapped up by a subprime mortgage origination desk and who now has an all-but-unemployable skillset?

For those of us who aren’t and never were in business school, however, the big question is what this all means for the economy. Will the best and the brightest now enter the real world, as opposed to the bizarre parallel reality of Wall Street, and put their skills to good and productive use? Or, conversely, will a cohort of finance MBAs infect the real world with their outdated and dangerous ideas about modern portfolio theory and whatnot, causing formerly well-run companies to follow the trajectory of Lehman Brothers or AIG?

To put it another way: what did this year’s MBAs really learn during their course? Was it much the same thing as their predecessors, or did the magnitude and severity of the financial and economic crash teach them a few home truths which will come in useful going forwards? I fear that the answer is largely the former: it’s hard enough just keeping up with your coursework, without trying hard at the same time to unlearn a large part of the compulsory curriculum. And certainly anybody I’ve ever talked to who’s taught a classroom full of would-be quants has told me that they tend to concentrate on formulas and algorithms to the point at which they can’t even perform a basic smell test on results, let alone look at those algorithms critically and decide to discard them.

But the optimist in me says that if there isn’t any demand for financial whizzbangery any more, then maybe the supply of it will wither quite quickly. And that today’s MBAs might yet add more value than you might think.